1. Economic Analysis of Projects
Afghanistan Energy Team
World Bank
Dubai, January 23-24, 2019

2. Maximize net benefit to society as a whole
Why bother?
Scarcity of resources
Land
Labour
Materials
Capital
Capital is a key resource
Can generally be used to purchase others
How should scarce capital be allocated?
Maximize net benefit to society as a whole
Other scarce resources?
What about air, water?

3. Which projects? Projects that draw on government’s capital
Directly – government pays from revenues
Indirectly – government takes on debt obligations
Conditionally – government guarantees returns to a third party
Thus, IPPs can also warrant analysis from the economic perspective if there is a PPA backed by government commitment

4. Examples of Projects Infrastructure Social Roads and bridges
Power plants
Transmission and distribution networks
Ports and waterways
Social
Health care – hospitals, health centers
Education
Environmental protection/rehabilitation
Can programs be subject to analysis? - e.g. child vaccination,

5. Economic vs Financial Analysis
Perspective of project implementing entity
Costs based on financial prices
Benefits generally limited to gain in revenues and/or reduction in costs
Designed to assess project’s financial sustainability
Perspective of country as a whole
Costs based on opportunity cost of inputs
Benefits not limited to project revenues
Designed to ensure that benefits to society exceed costs

6. Least Cost Analysis
First step is to ensure that proposed project is least cost
Define objective and desired outcome
Identify alternative ways of achieving outcome
Adjust for lack of comparability
Life cycle cost analysis
Identification of least cost alternative
Want to be comparing apples with apples, so first define ann objective and a desired outcome

7. But ….
Just because a project is least cost doesn’t make it economically viable
Benefits to society must exceed costs
Not sufficient simply to say that project is less costly than alternatives
Examples of least cost but not economic

8. Cost Benefit Analysis
Measures relationship between project costs and project benefits
Cost Benefit ratio
Benefits ÷ Costs - > 1
Economic Internal Rate of Return (EIRR)
Discount rate (i) at which stream of benefits equals stream of costs
Measures performance against a defined benchmark
Net Present Value (NPV) at i
Net value of future cost, benefit streams discounted to present at i
How we typically carry out an economic analysis of a project

9. With/without Most benefits are measured relative to some alternative
What would happen without the investment?
Before/after vs with/without
Economic analysis looks into future
Before/after wouldn’t reflect impact of growth on situation without project
EA requires with/without scenarios
Without scenario is the ‘counterfactual’
Without case is typically called a counterfactual
Fake news?

10. Opportunity Cost of Inputs
Investment capital –
discount rate
Imported materials, equipment –
Border prices – net of taxes and duties, plus transport to site
Traded goods –
Border price at exit port
Unskilled labour
Wage rate unless in surplus/shortage
Less than wage rate if in surplus, greater if shortage
Skilled labour
Foreign exchange
Official rate if freely traded
Watch for currency controls, black markets

11. Economic Costs Capital cost of project Includes: Excludes:
Border price of imported equipment and materials plus transport to site
Domestic land, labour and materials used in construction
Land returned to its original use? Use cost of mitigation
Excludes:
taxes and duties on imported equipment,
value added tax on domestic equipment,
income taxes paid by foreign contractors,
Any other ‘transfer’ payment

12. Incremental operating and maintenance costs
Includes
Labour and materials used to maintain facility
Operating and management labour
Materials used in operations – e.g. fuel for power plant, lighting, heating and other utilities
Equipment used in operations
Excludes
Subsidies paid to users
Income and other taxes on wages

13. Other Economic Costs Environmental costs
Damage to physical environment:
Temporary or permanent destruction of natural resources – forests, agricultural land, streambeds, wetlands, lakes and waterways, wildlife
Negative Socio-economic impacts
Temporary or permanent resettlement of sections of the population
Health problems
Lost income due to land expropriation

14. Economic Benefits Avoided use of alternatives Access to new services
Kerosene lamps
Solar lamps/panels/SHS
Generators
Batteries
Access to new services
Refrigeration
Air conditioning
Heavy duty tools
Computers
Other user cost savings
Time savings
Reduced damage to equipment

15. Customer Benefit of Increased Access
Willingness to pay for electricity supply –
Equal to area under the demand curve up to the point of price/quantity intersection
Electricity tariff
PLUS
Consumer surplus

16. Customer Benefits – Willingness to Pay

17. Non-linear demand curve

18. Electricity Demand Curve – DABS Customers

19. Sources for WTP Data Tariff and consumption data
Information on cost of alternative energy sources
Kerosene
Solar
LPG
Batteries
Generators
Surveys on use of alternatives

20. Other Economic Benefits
Income-earning opportunities
Machine shop
Irrigated farming
Beauty salon
Retail/commercial
Employment opportunities
Social benefits
Better health care
Improved schools/learning opportunities
Access to news and other information
Safety
Recreation opportunities

21. Environmental benefits
Reduced carbon emissions
Flood control
Preservation of forests, grasslands
Not using wood fuel

22. Non-monetary costs and benefits
Unmitigated environmental impacts
Improved health/education outcomes
Time savings
Some are hard to value but should at least be measured – what impacts? How many people?

23. Discounting Time value of money Financial Analysis Economic Analysis
Preference for payment now rather than later
Interest rate on bonds, bank accounts
Dividends on equities
Capital gains on equities, real estate, other assets
Financial Analysis
Look at stream of costs and revenues
Apply discount rate to determine yield
Value in year n – Cost/Revenue / 1 + 𝑖 𝑛
i = interest rate, n = year
Economic Analysis
Same Principle
Uses economic costs and benefits
Uses economic discount rate

24. Economic Discount Rate
Social discount rate
Foregone investment alternatives
Alternative uses of government funds
Foregone benefits
Social perceptions regarding value of benefits now rather than later
Low income, limited benefits, assign high value at margin
Economic growth, assign lower value to benefits
Thus with high economic growth projections, use a higher discount rate
Typical Discount Rates – WB Projects
10 – 12% opportunity cost of capital
+/- 6% based on social perceptions of benefits, historic growth rates

25. Net Cash Flow Net Cash Flow Stream of costs and benefits
Project economic life
Do discounted benefits exceed discounted costs?
Cost and Benefit Stream
Year 1 2 3 4 5 6 7 8 9 10 11 12
Capital Investment
250
500 50
Operating Cost 1
Operating Cost 2
Operating Cost 3 14 16 15 18 A
Total Cost 67 21 23 22 25 19
Benefit 1 85 90 95 92
100
Benefit 2
Benefit 3 35 B
Total Benefits
130
135
140
137
145
B - A
Net Cash Flow
-250
-500 63
114
117
115
120
111
113
Net Present 6%
$29.62
EIRR
6.8%

26. Sensitivity and Risk Analysis
How robust are the findings?
Test sensitivity of EIRR, NPV to key inputs/assumptions
Sensitivity analysis
Vary value of key assumptions over a range of values
Switching values
What value of each input causes the NPV to become negative
Use ‘what if’ analysis in Excel (under Data), and ‘goal seek’
Integrated risk analysis
Uses Monte Carlo simulation to calculate probability distribution for EIRR/NPV using probability-weighted values for inputs

27. Distribution Analysis
Identify winners and losers
Poverty level
Gender
Age
Ethnicity
Religion
Is the project well targeted in terms of national goals, priorities?

28. Shindand Electrification
What is our objective?
What were the alternatives?
Is our proposal least cost?

29. Cost-benefit stream - Shindand
Cost Benefit Analysis -- Shindand
2018
2019
2020
2021
2022
2023
2024
2025
2026
2039
Costs
Benefits
Net Cash Flow
NPV
EIRR

30. Shindand – Demand Forecast Number of New Customers
Number of Customers
Notes
Year 1
Year 5
Year 15
Residential
10000
Annual Growth rate of 8%, years 1-5, 5% years 6-15
Commercial
2000
Initial connections 10% of ultimate demand
Government 15 20 25
Agricultural
200
700
1000
Military Airport 1
50% load in year 1, 80% in year 5, 100% in year 15
Industrial Customers 10 40
100
Big Health Facility 4
Small Clinic 45 50
Mosque 35 38
Education Institutes
From feasibility study

31. Shindand – Forecast Peak Demands
Total Estimated Demand (kVA)
Total Active Demand (kVA)
Year 1
Year 5
Year 15
Residential
5000
6802
11080
Commercial
1000
1360
2216
Government
1500
2000
2500
Agricultural
1200
4200
6000
Military Airport
8000
10000
Industrial Customers
15000
Big Health Facility
200
800
Small Clinic
300
540
600
Mosque
350
380
Education Institutes
100
250
Total Active Demand
9950
18083
34027
Total Diversified Demand
7960
14466
27221

32. Shindand – Forecast Demand - MWh
Year/Tariff Class 1 2 3 4 -
Residential
Commercial
Government --

33. Herat Region – Average Tariffs
Average Electricity Tariff - Herat - $/kWh
Residential
0.0534
0.0667
Commercial
0.1379
0.1724
Government
0.1365
0.1707
Holy places
0.0536
0.0670
NGOs
0.1372
0.1716
Registered Companies
0.0819
0.1024
Unregistered Companies
0.1419
0.1773
All
0.0669
0.0836

34. Consumption and Payments - Without project case
Newly Connected Customers
Average Consumption & Price without grid
kWh/mo
Source
$/kWh
Residential
21.09
Survey
0.40
Commercial
96.59
1/3 grid
0.29
Petrol Gen
Government
Holy places
87.85
1/2 grid
0.49
1 MWp SHS
NGOs
Registered Companies
3,010.52
25% grid
0.26
Diesel Gen
Unregistered Companies
638.37
Average for Companies
1,824.44
School
= mosque
Health Centre
=commercial

35. Consumer Surplus For each class of customer –
Total consumption per year without grid X
[Cost per kWh without grid minus Tariff] =
Total consumer surplus per customer per year

36. WTP Benefits in year n – for each customer class
Number of new customers in year n X
kwH per customer per year
Tariff +
Surplus benefit per customer

37. Costs Capital Cost Operating and maintenance costs
Cost estimate
Adjusted for amount spent in each year
Minus taxes and duties
Operating and maintenance costs
15.5 % of sales based on financial statements
Cost of incremental power supply
Marginal source is imports
Adjust cost per kWh to reflect transmission/distribution losses

38. Other Avoided carbon emissions from diesel/gasoline generators
Offset by incremental generation in source country
Diesel emissions
780 t/GWh
CCGT
370 – 403 t/GWh
Carbon – USD 30/ton

39. Further reading
L. Squire, H. VanderTak, ECONOMIC ANALYSIS OF PROJECTS, Baltimore, Johns Hopkins University Press, 1975
J. Price Gittinger, ECONOMIC ANALYSIS OF AGRICULTURAL PROJECTS. Economic Development Institute The World Bank. 1984
Guidelines for Economic Analysis of Power Sector Projects : Renewable Energy Projects. World Bank Washington, DC. © World Bank. (2 volumes)
Handbook on Economic Analysis of Investment Operations, World Bank, 1998
Guidance Note: Greenhouse Gas Accounting for Energy Investment Operations, World Bank, Washington, DC, 2013